Key has "resilient earnings power without any visible obstacle," says Maclovio Pina, who follows the stock for Morningstar. He puts its fair value at $10 a share, about 12% above its price of $8.94. Terry McEvoy, an analyst at Oppenheimer, is more bullish. On Tuesday, he upgraded KeyCorp to Outperform, saying the bank's new strategy "should create a less-volatile, lower-risk revenue stream." His price target is $11, 23% above the current price.

The 187-year-old bank has 1,087 branches spread across 14 states in the upper U.S. and extending from the Northeast to the Pacific Northwest. This year, it's expected to post $810 million, or 86 cents a share, in net income, on $4.2 billion, in revenue, about flat with last year. Earnings per share are estimated to rise 7% next year, to 92 cents.

AS A RESULT OF THE $2 billion equity sales in the financial crisis and other capital additions, KeyCorp today has an estimated Tier I common-equity ratio of 11.4% as of Sept. 30, above that of its peers, including
M&T BankMTB 0.09457755359394704%M&T Bank Corp.U.S.: NYSEUSD127
0.120.09457755359394704%
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Volume (Delayed 15m)
:
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P/E Ratio
17.001338688085674Market Cap
16856769271.3306
Dividend Yield
2.204724409448819% Rev. per Employee
300049More quote details and news »MTBinYour ValueYour ChangeShort position
(MTB) and
Huntington BancsharesHBAN 0.36330608537693004%Huntington Bancshares Inc.U.S.: NasdaqUSD11.05
0.040.36330608537693004%
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P/E Ratio
15.136986301369863Market Cap
8928515468.20358
Dividend Yield
2.171945701357466% Rev. per Employee
250423More quote details and news »HBANinYour ValueYour ChangeShort position
(HBAN). Its government debt has been repaid. And its loan portfolio is improving, with nonperforming borrowings at 1.27% of total loans, down from a peak of 3.68% in the third quarter of 2009. Key had solid loan growth of 5% in the third quarter, driven by a strong rebound in commercial and industrial borrowing.

As the Fed has eased restrictions on dividends and stock buybacks, Key has been returning cash to shareholders, repurchasing shares at below tangible book value and boosting its payout. Through the end of the third quarter, Key had bought back about 2% of its shares outstanding. A comparable amount has been approved. With a higher dividend, the stock yields 2.2%, and the payout still has room to grow. "It's more than likely that Key gets approval to redeploy capital in the form of a higher dividend payment and continued repurchase of shares," says John Crowley, a portfolio manager at shareholder
Eaton Vance Large Cap Value
Fund (EHSTX).

BETH MOONEY, A SEVEN-YEAR Key veteran and CEO since May 2011, says the bank is "infinitely more focused" than it was before the financial crisis, with a "lower risk profile, more-predictable earnings and revenue streams, and a high level of capital." Previously, the bank emphasized revenue growth and ranked poorly on efficiency.

Key has pared its loan portfolio, which had been weighed down by billions of dollars worth of bad loans on everything from home equity and commercial real estate to boats and recreational vehicles. The loan portfolio is now $51.4 billion, compared with a peak of $76.4 billion in the first quarter of 2008.

Commercial lending, meanwhile, has turned its focus to small and middle-market companies with revenue up to $1.5 billion. "On average, our new clients are more profitable than our existing loan book," says Mooney. Key now offers investment-banking services, including merger advice and lease financing, to more-creditworthy clients, and has added about 80 bankers since 2010. The corporate portion of the bank is by far its most profitable, with a net-income margin of 27%, versus 6% for community-banking services.

At the same time, the bank's net interest margin—the difference between what it earns on its assets and its borrowing cost, as a percentage of earning assets—has stabilized around 3.2%, which is better than most rivals. This margin should fatten further since Key still has more than $1 billion of higher-yielding CDs that it issued for liquidity purposes in the crisis and that are now approaching maturity. It should be able to replace them with lower-cost deposits, boosting the margin further.

The Bottom Line

KeyCorp shares trade at a 5% discount to book value, below peers. At 1.1 times book, the stock could be worth $11 a share, or 23% above its current price.

In any event, the bank is less reliant on its net-interest margins than many rivals. About 45% of its revenue comes from fee income, including investment banking. That compares with an average of 26% for its peers, according to JPMorgan analyst Steven Alexopoulos, a KeyCorp bull.

The stock trades at a 5% discount to tangible book value, meaning share repurchases actually boost tangible book, an important measure for banks. Many of its rivals trade above book. At 1.1 times tangible book, a reasonable valuation, the stock would be worth Oppenheimer analyst McEvoy's target of $11. Woody would be proud.

Restoring Order

KeyCorp CEO Beth Mooney says the bank is "infinitely more focused" on predictable earnings and revenue streams than it was before the financial crisis.